Trust, Social Networks and the Informal Economy: A
Comparative Analysis.
(Preliminary Version)
Larissa Adler Lomnitz
Diana Sheinbaum
IIMAS-UNAM
Abstract
In this study we will attempt to show that trust is a cultural concept that should be
ethnographically described, as its meaning varies according to the culture of each society
and in every particular situation. Trust is a central component of social solidarity and the
cement used to produce cohesion within the social networks composing the structure of
society. Social networks based on trust might allow individuals to cope with the
imperfections of a given socioeconomic system (state or market dominated), but they might
also serve to erode the institutional frame of states by facilitating less desirable
transactions (corruption). Hence, trust may have positive connotations for those who
benefit from having social networks or negative consequences both for individuals that lack
such networks and for the formal institutions of society. In this paper we will try to
understand the meaning of trust by analyzing its role in the informal economy of three
different socioeconomic systems. Following our previous studies (Lomnitz 1971,1988) we
will discuss the importance of social networks based on trust and loyalty for the economic
and social survival of the middle class in Chile, comparing it to the informal economy in
the former Soviet Union. Finally, drawing from literature on post-socialist societies we will
discuss the role of trust in the social networks that have dominated the transition to a
market economy. In Latin America social networks have become the means on which
informal activities take place allowing the poor to survive physically and the middle and
upper classes to maintain their social status and privileges. In communism, the use of
personal connections (social networks) has been recognized as a central strategy to satisfy
shortages derived from the inefficiencies of the system, and as an important legacy with
tremendous consequences for the post-socialist regimes that followed. In this article we
attempt to show the universality and persistence of trust-based networks as well as its
socio-cultural embeddedness and the ambivalent consequences they have on state and
society.
1
TRUST
We understand “trust” or confidence as a social concept whose meaning is culturally
determined and therefore it should be ethnographically described, as it does not have the
same meaning in different societies and for different situations (Rose-Akerman 2001: 420;
Lomnitz 1977: 196). In general, trust is a central component of social solidarity and the
cement used to produce cohesion within the social networks that compose the structure of
society (Simmel 1964: 318).
Trust can be defined as the real or effective psychosocial distance between
individuals. It is associated with social closeness in the sense of sharing the same categories
of expected rights and duties, plus shared values and interests. An individual feels
confidence in another when s/he trusts the other to have the ability, the desire, and the good
disposition to perform an exchange, or when his own familiarity with the other allows
him/her to make a request. Another form of expressing trust is the act of volunteering an
item of personal information of an intimate character, thus implying confidence in the
discretion and friendly disposition of the other person. "Trust then, is a relational response,
not a result of blind loyalty, that permits people to take risks in dealing with each other”
(Rose-Akerman 2001: 543) "trust is a particular level of subjective probability with which
an agent assesses that another agent or groups of agents will perform a particular action
...when we say that we trust someone or that someone is trustworthy, we implicitly mean
that the probability that he will perform an action that is beneficial or at least not
detrimental to us is high enough for us to consider engaging in some form of cooperation
with him" (Gambetta, 1988: 207).
No society can function without a minimum of trust among its members. In small
and pre-modern societies individuals characteristically relate repeatedly with the same
persons in practically all situations. The networks used to acquire things are primarily
informal, face-to-face associations of people. Members of small societies tend to move
within culturally prescribed roles, and these roles include the specification of mutual
assistance. Everyone knows who is to be trusted and who is to be approached for help;
confidence and trust is implicit in the social relation. As a society grows and becomes more
complex the social, economic and occupational mobility of its members increases and the
total roles found in small societies become fragmented. In an ideal modern society where
collective action is institutionalized, the individual is led increasingly to depend on formal
institutions and informal interpersonal networks are relegated to certain areas such as
affective aspects of social life (kinship, friendship). In this situation, trust (between
individuals and institutions) acquires another meaning different to that related to personal
bonds, it becomes, therefore, necessary to distinguish between “horizontal trust” (i.e. trust
in others) and “vertical trust” (trust/confidence in institutions), that is, “trust in the
impartiality and fairness of institutions and trust in the partiality and favoritism of one’s
close friends and relations” (Bo Rothstein 2001; Rose-Akerman 2001).
In this paper, however, we claim that the use of informal exchange networks based
on interpersonal trust are not a residue of “pre-modern” societies but an intrinsic element of
complex modern societies insofar as they are the response to the inadequacies of
institutionalization. Informal social networks have been shown to play an important role
within the urban poor of underdeveloped capitalist countries where the market and state
have failed to adequately insure the satisfaction of needs of all members of society. In such
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marginalized sectors, it becomes vital for an individual to enjoy the support of a social
group for which s/he feels sufficient trust, to rely on it for major emergencies as well as for
the satisfaction of its most immediate needs. Interpersonal trust is the prerequisite for flows
of exchanges of goods and services to take place. As a result, we find an informal economy
organized around trust-based social networks allowing the poor to acquire the minimum
necessary for their survival. In this case, trust has a positive connotation as it is use to cope
with the socioeconomic disadvantages of the poor (Gonzalez de la Rocha: 2001; Lomnitz
1977, 1978, 1982).
There is, however, a different aspect of the use of trust-based networks. In a
previous study, Lomnitz proposed to examine the pervasive utilization of informal
exchange networks within the formal sector itself. The exchanges analyzed included
various forms of trading influence and bureaucratic favors for equivalent services or
material rewards. Depending on the political system, some forms of informal exchange are
tolerated while others severely repressed. Even in the latter case, illicit economic activities
within the state bureaucracy are often seen as inevitable (if not actually useful) by members
of elite groups within the formal system. In this study Lomnitz (1988) showed that informal
activities based on personal connections are not random or chaotic, they constituted a
system of exchange based on interpersonal trust and loyalty that run underneath and
parallel to the formal administrative rules.
Weberian analysis of the rationality of bureaucratic systems ignored the informal
activities that sprang up within formal organizations as a response to the malfunctioning of
bureaucracies. However, social scientists based on first-hand observations have developed
an extensive literature focusing on the discrepancies between the goals and structures of
formal organizations and the historical and cultural specificities of the social systems in
which those organizations are embedded. The main consequences of this conflict appear to
be inefficiencies resulting from rigidity and corruption. Personalistic, culturally determined
loyalties to kin and local groups, that is, trust on interpersonal networks, often defy the
more nationalistic ideologies that underlie bureaucratic rationality.
In this paper we will relate formal institutions of society with interpersonal
networks through which informal exchanges are realized. Informal economic activities
have been defined as those which escape state regulations both on production and
distribution of goods and services and on the nature of their final objective (legal, illegal or
criminal) (Castells, Portes & Bentham 1989: 12). Informal exchanges are possible through
social networks based on cultural institutions such as family, friendship and other relations
in which trust and loyalty among its members is the underlying principle. We will review
three examples showing the different role of trust-based networks in the informal economy:
an informal exchange of bureaucratic favors in Chile, where the state’s role was that of
regulating and distributing social services; in the Soviet Union, where all production and
distribution of goods and services were under state control; and in post-communist
transitional societies where the introduction of a market dominated economy has weakened
the state and, yet informal economic activities based on the utilization of “network capital”
have not disappeared but on the contrary seem to have flourished (Sik 1994).
3
TRUST: THE ROOTS OF INFORMALITY
In an ethnographic study on the Chilean middle class Lomnitz (1971,1991) found a
culturally defined system of exchange euphemistically called “compadrazgo” (alluding to
the closeness that god parenthood implies in the catholic church)1, which was based on trust
between individuals. This system involved a continuing exchange of complementary
services (“favors”) performed and motivated within an ideology of friendship. Such favors
were often of a bureaucratic nature and usually involved giving someone preferred
treatment and therefore setting aside the rights and priorities of third parties, or of the
community as a whole. An informant defined compadrazgo as a form of assistance used “to
obtain something with greater ease and in less time”. He pointed out that “the objectives are
usually legal, though the means may be less so.”
Compadrazgo is a tacit dyadic contract or chain of such contracts involving
common friends acting as go-betweens. Essentially, this system was egalitarian in that it
presupposed that all members of the urban middle class had access to social connections
within the civil service hierarchy “everybody has friends and relatives.” Favors dispensed
to friends and relatives within such a system included:
Job placement. In a situation of job scarcity and danger of status loss through manual labor
it is not surprising to find the compadre valued as the first and last resource of livelihood.
The actual process of job hunting consist in reviewing mentally all one’s personal
connections in order to locate someone who is close to the source of appointments in a
given agency. Conversely, finding a person for a job opening involves going over the list of
one’s relatives and friends in the hope of discovering someone suitable.
Bureaucratic favors are the most common use of compadrazgo: acquiring certificates,
licenses, transcripts of documents, passports, permits, identity cards, tax clearances, and
countless others red tape items which would otherwise require many mornings spent
standing in line and chasing paperwork from one office to another.
Loans. The scarcest of all resources at the time was money. Borrowing was often beyond
reach of the middle class because of the high collateral required. A well-placed friend in a
bank or credit association facilitates matters. A caja is a credit union operated under the
social security system; it is supposed to provide loans, but is chronically short of funds. As
soon as fresh funds for loans become available the compadre is notified ahead of the
general public and his application is then guided to the top of the pile so as to get it
processed before the funds are exhausted. This is a typical use of compadrazgo, a situation
in which people in key positions give their relatives and friends confidential tips based on
inside information. None of this appears to the practitioner as strictly illegal since “no harm
is done except to the people waiting in line, everyone of whom would have done the same
if he’d had the right connection”.
Schools. Admission to the better schools, both public and private, is difficult because of the
tremendous demand for places at the few establishments of top reputation. Any compadre
who works at one of these good schools, or who has friends who do, may be in a position to
perform a vital service which elicits considerable gratitude.
Today the same institution is called “pitutos” (plugs) and it has different names in different societies such as
“palanca” (leverage) in Mexico, “contactos” (conections), “cuña” (wedge), “sociolismo” in Cuba, “guanxi” in
China, “protexia” in Israel, “blat” in the Soviet Union, etc.
1
4
Legal favors. According to a lawyer informant there is no end to the use of compadrazgo in
legal matters. For example, files can get conveniently lost, charges are suspended or
sidetracked, witnesses are coached, fines or bail are set at minimal levels.
Social introductions to persons who control access to jobs or whose acquaintance is seen as
desirable and potentially useful is yet another example. Invitations to dinner parties are
often used for such introductions and are therefore reckoned as important favors; widening
the circle of ones friends and acquaintances is essential to success in all walks of middle
class life.
Waiving of priorities is getting a number of scare items for which there are long waiting
lists: telephone service, buying a car at wholesale price, scholarships and grants, service
commissions abroad, and so on.
Politics. Many informants believe that the Chilean party system is based largely on
compadrazgo. Certain well-known politicians started on the basis of a personal following
of people who owed them favors. (Lomnitz 2001)
The preceding list of services obtained through compadrazgo is, of course, always
conditional on having the right friends in the right place at the right time. No person is ever
in a position to use compadrazgo in every situation that arises. The essential point is to
have as many friends and connections as possible. Hence the tendency, which has become a
mental habit, to look for a compadre before undertaking anything at all.
What cannot be obtained through compadrazgo? According to informants “anything
that goes against the ideology of friendship and “decency”. Sexual advances made by a
man as a result of granting a favor to a woman would be regarded as extremely gross
behavior. Any behavior which infringes middle-class standars: theft, murder, taking
advantage of women or other defenseless persons, and in general acts against dignity and
“chivalry”. Such acts would destroy the rationale of friendship by degradating it to
complicity. Compadrazgo has a moral code which sets boundaries on permissible favors
and return payments.
Favors obtain under compadrazgo were rendered without material compensation of
any kind. Yet according to an informant “the person conferring the favor is always aware of
future benefits which may accrue to himself, or to some relative or friend”; it is a debt of
honor that may be payable at any time.
Material payment in return for favors is graft. It means the absence of any posibility
of a personal relationship or of having friends in common. Accepting a bribe is an
acknowledgment of social inferiority, like accepting a tip or gratuity. The major resource of
the middle class is the control of public and private administration; thus in this case, the
system of exchange of favors amounts to a system of mutual solidarity essential to the
survival of the networks that compose the middle class. It presupposes between the partners
of the exchange a special kind of psychosocial closeness, which in Spanish is called
confianza (Lomnitz 1971:102). This refers to the kind of trust that must exist toward a
person of whom one is about to request a given favor or service. If the required degree of
confianza does not exist, the favor may be requested through a third person who is on terms
of confianza with both parties. This leads to the proliferation of reciprocity networks,
initially based on kinship, since confianza normally exists between close kin, but frequently
extends to include hundreds of people among friends and acquaintances.
5
Scale matching favors with social distance. X-asis shows level of confianza, y-axis shows
level of favors.
Figure 1 represents the continuum of social distance as perceived by Chileans.
Labels such as “intimate friends,” “close friends,” “acquaintances,” and so on are
categories used by ego to classify relations. Individuals may be moved from one category
to another, depending on the intensity of reciprocal exchange. The types of favor to be
asked of a person depend on one’s social distance (or trust). It can be said that the practice
of reciprocal exchanges is embedded in an ongoing social relationship and is determined, to
a great extent, by “intervals of sociability” (Sahlins 1963: 144).
CONFLICTS OF INTEREST: THE DYNAMICS OF INFORMALITY
Within the formal sector, trust-based interpersonal networks have generated a system of
informal exchange. The individual official who defends and administers the system and
who creates its laws and controls, is simultaneously a member of a network of primary,
culturally determined loyalty relations that include family and friends. How is this apparent
conflict of interest resolved?
At the outset it is necessary to point out that the conflict between formal and
informal duties and obligations is not merely a conflict between community and individual,
between public welfare and private interest. On the contrary, it is the conflict between rival
ideologies, each of which is acknowledged and lays claims to the loyalty of the individual.
In the Chilean case, the formal system rests on the liberal ideology of’ fair play,
equality before the law, and economic rationality, while the informal system is sustained by
a complex of ideological components: chivalry, “noblesse oblige”, family, and group
solidarity.
The conflict between rival ideologies is expressed in the rules of exchange that
though unwritten, are fairly strict. In addition to the general requirements of confianza and
social equality, there are limitations on the kinds of favors requested and the manner
(etiquette) of requesting them. Among the “dos and don’ts” we have noted the following:
don’t request favors that might threaten a friend’s vital interests or the safety of that
6
person’s job, don’t mix friendship and business, sentiment and profit; don’t be impatient,
allow for your friend’s personal pace in complying with your request; phrase your request
in terms that reflect your degree of confianza (see Figure 1). Thus, among friends who are
on less than intimate terms, it is customary to present one’s case as a request for advice,
thus leaving it up to the friend to offer assistance. Among close friends, such an indirect
approach would be offensive, since it would imply casting doubts on a friend’s readiness to
be of service. On the contrary, far from being demoralizing, compliance with the rules of
sociability that surround relations of trust, whether toward a relative or a friend, acquire a
quasi-sacred ritual character that compensates for the uneasiness the individual is liable to
feel about the social system in general.
The requirement of social and economic equality can never be met exactly, nor can
the resources available to each partner be the same, or there would be no motivation in the
exchange. When a friend moves to a higher position, his or her friends may become aware
of their limited power to reciprocate. They stop asking for trivial favors and approach the
person only when their request befits the person’s rank. They may express their gratitude
through personal and political loyalty; hence, there is a continuum of reciprocity that
approaches patronage. Patron–client relations are a form of reciprocity, where benefits to
subordinates are traded against loyalty and power.
Essentially, as the differentials in power increase between the partners of the
exchange, the services of the more powerful partner are increasingly reciprocated through
demonstrations of gratitude and loyalty. A hierarchy is not just an abstract organizational
chart where posts are filled by mutually interchangeable officials - it may also be a network
of patron–client relations. At each articulation there is a downward flow of resources
(employment, protection, bureaucratic patronage) in exchange for work and loyalty. The
patron provides security of employment, political protection, and dependability in
unexpected circumstances of need in exchange for loyalty, expressed through personal
commitment to the patron in labor, political support, and ideological allegiance. The
decisive importance of cultural variables such as loyalty and trust means that a patron-client
relation, like reciprocity, is embedded in a long-term social relationship. In conclusion, the
symmetry of the relationship depends on social distance: the closer the social relation, the
greater the confianza and consequently the balance of the exchange. Among brothers, for
example, there may be a power differential related to age and personality, or to the kind of
resources controlled by each, but the exchange remains more symmetrical than for
strangers. As social distance increases vertically across class boundaries, patronage loses its
interpersonal character and changes into payoffs, or market exchange.
Of course, this means that formal economic and political systems become
permeated by sociocultural rules of sociability. These rules may or may not be compatible
with dominant rationalistic ideologies that supposedly rule the formal system, whether it is
called a liberal-democracy, communism or a post-communist society in transition to a
liberal-democracy. In each case, informal exchange systems based on culturally
conditioned forms of sociability have proven surprisingly adaptive and resilient in the face
of modernization and changes in cultural values.
The formal systems of today cannot be understood solely on the basis of their
organizational structure and administrative regulations or by-laws. Administrative,
decision-making should not be taken at face value. Behind many formal decisions there are
reasons that are not formally acknowledged, some that concern primary moral principles of
7
the culture (loyalty, confianza) as embodied in institutions such as the family or friendship,
and others that follow the logic of private gain and may be consider as corrupt practices.
SECULARIZATION OF TRUST
The preceding discussion is intended to show that the social context of informal exchange
introduces ideological components that lend a moral character to the performance of the
obligations derived from interpersonal trust. We are dealing with basic symbolic structures
as related to primary solidarity. However, when interpersonal exchanges are bereft of its
moral context, there is a secularization of the institution of reciprocal exchange and its
gradual transformation into market exchange.
Market exchange may arise when (1) a personal relationship between the partners is
precluded because of class differences (it may also be the basis of a patron-client relation)
(2) the state apparatus increases in size to an extent that makes it increasingly difficult for
informal reciprocity networks to cover individual needs; and (3) the type of favor falls
outside the category that can be justified within the ideology of friendship and family
solidarity.
For example, among private business class, certain bureaucratic favors were
obtained through bribes (when necessary), because there was an explicit desire to draw a
distinction between the social status of the businessperson and of the administrative official
involved. On the other hand, should a similar need arise for a member of the state
apparatus, it would be necessary first to make sure that the individual to be bribed does not
frequent the same social circles. The case of Mexico is interesting because of the extent to
which the form of administrative corruption called mordida (a “bite”) has become
generalized throughout the public administration, from high officials down to the corner
policeman. When a driver offers a bribe to a policeman, both know that the likelihood of
their meeting again socially is negligible. But when this is not the case, the transaction
involves a certain etiquette, which increases with the rank of the person to be bribed.
Face-saving devices include the use of formal intermediaries, charging the client an added
“tax” or other nonexistent service charge.
This is not to say that all bureaucratic favors are settled through bribes as individual
officials have also obligations with their personal networks. It is true that market exchange,
in the form of administrative corruption, remains morally unsavory and many people
abstain from it as a matter of principle, but the use of social relations for purposes of
obtaining a favor has no such negative aura. In all cases, moral standards of behavior are
culturally conditioned and vary with each society. Therefore, the boundary between
reciprocity and market exchange is a thin line. If corruption is strictly defined as “dishonest
behavior that violates the trust placed in a public official” (Rose-Akerman 2001: 527)
involving the use of a public position for private gain, how can we define the institution of
compadrazgo and reciprocity exchanges of favors?
8
TRUST AND INFORMAL ECONOMY IN THE FORMER SOVIET
UNION.
The effects of informal modes of exchange on society can best be appreciated where
the formal system is more rigid and all-embracing or monolithic. This is notably true for the
socialist countries, where a centralized state apparatus ran politics, production, labor, and
most commercial and cultural activities.
Economic planning was "an organic, fundamental feature of real socialism" and
direct bureaucratic control was the major task of the Nomenklatura (the administration
elite) (Voslensky 1978:163). Under the classical socialist system bureaucratic coordination
was the mechanism applied most widely and forcefully. Although bureaucracy exists in
other systems, classical socialism is the first system in history to merge these partial
bureaucracies into a single entity embracing the whole of society. The power elite,
hierarchically structured and sharing power with no other group had the exclusive right of
disposal over the state-owned means of production. Within its own ranks it eradicated other
coordination mechanism to the degree it was able and relied as much as it could on
bureaucratic coordination. Relations between state-owned firms were not coordinated by
the market, instead were bureaucratically coordinated through a vertical system of linkages
(Kornai 1992: 97-98).
Unfortunately, the ideal rationality of planning was offset by the frequent
irrationality of bureaucratic mismanagement, inefficient planning or by practices that were
based on others forms of exchange (market and reciprocity). The result was a chronic
shortage of consumer goods and other commodities due to inefficiency in production and
distribution. The considerable inertia of the bureaucratic apparatus generated and
encouraged waste, pilfering and negligence (Bahro 1978: 235-241; Kornai 1992: 228-301).
In Gorbachev words strict planning and regulations limited initiative and produced a second
economy:
A serious fault of the political system was the statization of the social life. State regulations
extended practically to all activities in society. The tendency to a total planning and
centralized control of all aspects of life literally put a constrain in the country, limiting the
initiative of people, organizations and collectivities, giving rise among other things to a
“parallel” economy that took advantage of the inability of the state organs to satisfy people
needs.” (Gorbachev 1993: 11, our translation from Spanish)
Those living in a socialist country experienced countless frustrations of thwarted
purchasing intentions, queuing, forced substitution, searches for goods and postponements
of purchases in their daily life as consumers and producers (Kornai 1992: 234). These
deficiencies gave rise to informal solutions. The literature specialized on the former Soviet
Union describes the most common forms of economic activities within the "shadow" or
"second" economy as including professional or technical services rendered outside office
hours; goods produced in the plant or shops but diverted for private sale; parallel
production within state enterprises using diverted or surplus materials during off hours;
private constructions teams (shabashniki); brokers who supply contacts, locate scarce
supplies and handle merchandising (tolkach); various forms of bribery and most commonly
informal exchanges of goods and favors based on interpersonal relations and trust (blat)
9
(Grossman 1977, 1979, 1981, 1983a, 1983b; Simis 1982; Altman 1983; Kaiser 1976; Smith
1979, and others)
BLAT: THE ROOTS OF INFORMALITY
In the Soviet system, total welfare in the family was the sum of what could be obtain from a
multiplicity of “second” economies that Katsenelinboigen (1978 quoted by Rose 2000:37)
has aptly characterized as a “rainbow-coloured” system, since methods for producing or
getting goods and services shaded into each other; they were interdependent rather than
separate. The three primary “colors” of the rainbow system were the official or modern
economy, relying on legal, large-scale formal organizations such as state enterprises or
pensions from the ministry; an uncivil or anti-modern economy in which individuals earned
cash outside the reach of the national plan or by breaking rules about the allocation of
goods and services; and social or pre-modern economies in which goods and services were
produced within households and informal networks without any money changing hands
(ibidem).
Ledeneva in her book Russia’s Economy of Favors (1998) describes blat as an
informal exchange system based on interpersonal bonds of trust by which individuals solve
their daily lives problems. Blat is characterized by a reciprocal dependence that engendesr
regards for and trust on the other over the long term; it is a non-monetary exchange which
derives from and creates relationships. It takes place within a given community between
people who interact on a regular basis. The specific character of blat as an exchange of
“favors of access” is possible because it is embedded in private relationships, trust-based
social networks, as the case of Chile described above. Reciprocity in blat relations is
created and preserved by a mutual sense of “fairness” and trust, in which each side takes
responsibility as the recipient both for his/her satisfaction and that of the other. People
trusted each other because they knew one good turn deserved another and this was in their
mutual interest.
Blat relations are predicated upon belonging to a personal network, that is, a
relatively closed social circle. It was one of the most common features of everyday life that
individuals routinely constructed, and were selectively recruited into. Social networks such
as kinship and friendship were the principal social contexts within which ties to significant
others were organized (Strathern 1981 quoted by Ledeneva 1998). Through these social
networks, individuals gained not only opportunities for interaction but also access to
resources.
As in Chilean compadrazgo, in blat there are unwritten rules which constitute the
moral code of the exchanges. An untrustworthy person may lose his/her opportunities to be
involved in the chains of relationships and thus fall out of the blat network. Blat relations
were regulated according to the logic of informal relations, such as not cheating one’s
neighbor, “one should ask the right person at the right moment about the right thing”;
money was not to be given or accepted, for it would deprive the relationship of a personal
basis and insult the recipient; keeping contacts and sharing problems with friends so as to
open the door for obtaining and offering help; and then in general: maintaining a blat-style
or a skill of approaching people in a pleasant or promising manner: to obtain something by
blat – in modest volume, with discretion, normally in situations of urgent need and within a
10
closed personal circle- was a norm, to overcome its limits was theft and corruption
(Ledeneva: ibid).
Comparing the two systems of exchange we have described, that is compadrazgo
and blat we can appreciate the similarities between them in that they follow similar cultural
codes based on trust. However, one important difference is that the morality of blat
relations did not exclude the logic of “beating the system” nor violating the rules for the
sake of efficiency. Another difference is that the Soviet system featured a more extensive
use of market exchange in the form of direct payments in return to administrative franchises
than the Chilean system. It is also true that the Soviet system had evolved a complex and
rigid set of bureaucratic controls in which it became less likely to have “the right friend in
the right place” for all needs; hence, personal interaction were increasingly replaced by
money. However, even in the case of graft, there are underlying rules of sociability and
trust due to the illegality of the transaction.
THE SECOND ECONOMY
According to Grossman (1977, 1981, 1983b) it was difficult to estimate the share of the
country's total economic activity that corresponded to the second economy, since these
activities were illegal and could not be monitored in conventional ways. O'Hearn (1980:79) pointed out that as the second economy added to the aggregate supply of goods and
services, it also siphoned off resources from the formal economy through thefts and
diversion of manpower, thus contributing to the inefficiencies that generated informality in
the first place. He concluded, "as long as the second economy exists as a corrective
mechanism for the planned economy, there is no incentive to improve central planning"
(1980:229-231). This state of affairs contributed considerably to deteriorate the system
since it ran counter to the system's ideology and the formal functioning of the state.
The "second economy" branched out into most fields of economic activity. Private
enterprises, where outlawed, sprang up illegally in the consumer goods industries, in the
marketing of quality farm and dairy products, and in luxury or high technology items.
Eventually most goods and services became available in this fashion, thus further
decreasing the incentive to make the formal economy work. For example, failures and
delays in the distribution system had a serious effect on production. The director of an
industrial concern depended on the punctual delivery of many essential materials and parts;
otherwise, production quotas could not be fulfilled within the assigned period. The entire
staff and workforce also depended on these deliveries for their promotion and bonuses. A
typical solution was found by creating a managerial position within enterprises in charge of
getting informally and on time the materials needed. Normally this position was occupied
by a member of a particular ethnic minority who through his personal connections with
other managers occupying a similar position and belonging to the same ethnic group would
obtain the needed resources in exchange for another similar favor that he could get through
his own social network. This situation encouraged the growth of an informal economy
dependant on brokers and illegal suppliers. Repression of these illegal activities in turn
stimulated the proliferation of controls that aggravated the situation. As a result, the formal
economy never caught up with demand: shortage occurred not only at the consumer level
but also in industry, where shortages in critical supplies and equipment interfered with
production.
11
State officials engaged in production and distribution, professional and service
personnel “moonlighted” in private to supplement their official incomes, and so on.
Officials with access to bureaucratic decisions had valuable services to offer. Official
controls increasingly took the form of bribes and other exactions in kind. As the system
looked the other way, everybody sold or bought goods and services on the side, thus
diverting an increasing proportion of state resources into the second economy and
channeling public resources for personal profit.
The following case study by Altman exemplifies the way the second economy
operated in the Soviet Union and the importance that trust had in it. This study is the result
of a reconstruction of second economy activities done among emigrants from the southern
republics of the USSR, Georgia, Uzbekistan and Tajikistan, to Israel in the 1970s. Yet his
conclusions are not confined to these countries alone; cultural differences and regional
specificities do not necessarily change the overall nature of the communist system (Altman
1989).
The central point of these studies is the recognition that the informal economy
depends largely on social networks that are socially embedded and operate within a set of
culturally prescribed rules: “Trust is a fundamental requirement in the operation of the
second economy. A man’s word has to be his bond”. In Georgia, for example, there is an
unwritten code of honor whose infringement is penalized by “shame.” Networks are based
on partnerships between kin and close friends (family enterprises). Depending on social
distance, other friends play roles as suppliers, brokers, retailers, and so on. Hence the
importance attributed to friendship and to feasts at which friends are entertained at great
expense. “Networks dictate marital choices, are a prime allocator of resources, influence
one’s occupational options, dominate recruitment and career development and set the limits
to the scope of expansion for enterprises, and may finally determine if, how long and in
what way a man will spend time in jail for economic crimes” (Altman & Mars 1983: 4–6).
In the study on Georgian Jews, three industrial plants were described: a cookie
factory employing 200 workers, a textile plant with a working force of 1,000, and a light
metal industry with 100 workers. In each, the informal (illicit) output was three to four
times higher than the formal production (according to the plan). The informal partners who
ran the business were, in each case, the people who occupied the top administrative
positions in the plant (director, production manager, etc.).
Illegal production of consumer goods presupposed the existence of a network of
suppliers and distributors, as well as the connivance of inspectors and authorities at all
levels. The fact that the industrial operations described by Mars and Altman were
considered “quite safe” meant that a well-organized, reliable network of this kind existed.
The operation included obtaining low official production targets, as well as a high wastage
allowance, in order to accommodate the secondary production. The remaining materials
were purchased on the black market, or were obtained through barter. Substandard
quantities or qualities of ingredients were part of a common practice to help fulfill the quota
and to have enough raw materials left over for informal production. Defective production
(“seconds”) was sold in bulk to members of the network. Vital supplies were obtained from
government stores through bribes and payoffs. Labor had no access to production figures.
Those foremen who were in the know earned higher salaries. Bookkeeping was
systematically juggled. For instance, the production lines were in “maintenance” at times of
peak illegal production. Payoffs to officials ranged from 3,000 rubles a year to the director
of the State Planning Office, 1,500 rubles to the chief of police, and 500 rubles to the
12
gatekeeper. Payoffs were in cash and were sometimes paid in monthly quotas. Politicians
were bought off by invitations to parties and by expensive gifts on special occasions, such
as weddings. Consumer goods outlets stocked a few official lines that were sold at official
prices, but most of the business was under the table.
In one case studied by Altman (1983) the store was licensed to sell 34 products but
actually stocked about 40. Scarce items were sold only to favored customers (kin and
friends). Quality merchandise for black market sales was obtained through the network of
brokers throughout the country. Unofficial transporters conveyed fresh produce directly
from the village to the retail outlet, avoiding the clumsy official distribution system. To
prevent complaints and denunciations, there was an element of trust between merchant and
customer. Inspectors and police were bought off. The jobs themselves (factory director,
store manager, Party secretary) were auctioned off to the highest bidder. In case of trouble
(e.g., blackmail, periodic police raids, infiltration by agents as clients, and so on) the
brokerage network functioned as a network of mutual assistance to bail out any threatened
member and to obliterate incriminating evidence. Large sums of money were quickly
assembled. In one case, more than 70 people were contacted in order to secure the release
of an arrested person. Response in crisis situations was the test of the network. Usually an
experienced member of the network was appointed as negotiator or representative to solve
the crisis at the local level before it spread to higher levels.
When the First General of the Georgian Communist Party was purged, many of the
networks broke down. Too many vital links in the parallel economic system had been
arrested or removed. It would have taken years before new networks of suppliers and
cooperating officials could be built up. The Jews were usually dependent on non-Jewish top
officials in the Party and police structure. Thousands of them decided to migrate to Israel
when Kruzchov came to power and changed the Georgian chairman of the Communist
Party who therefore replaced the leading Party and State officials throughout the Republic
including key individuals who supported most of the operators of the Jewish networks.
In conclusion, trust-based informal networks were essential to the operation of the
second economy in three ways: (1) as a power base for the allocation of scarce resources
and the opening tip of new economic opportunities, as well as access to promotions,
educational opportunities, and other scarce services; (2) as a collective security device
against threats from the formal system and (3) as a pool of resources, particularly during
emergencies. The larger the network, the more secure and profitable it was, and the more it
could grow (Altman 1983: 945). At the same time, informal networks became in the last
decades of communism, a fundamental asset within the formal economy, particularly for a
new group of managers which recognized the significance of informal ties in the interest of
their company and, of course, of themselves. In this sense, managerial socialism served as a
place for the original accumulation of informal network assets, which after 1989 became a
crucial feature of the transformation as the structure of their informal ties determined not
only personnel selection for top managerial positions but also the shape of the economic
organization. In socialism, informal social networks which included reciprocal exchanges
between social and economic equals, patron–client relationships including political cliques,
and market exchanges, became the way of doing things (Böröcz…). In every instance,
including in market exchange, trust was a basic element.
As we saw, the Soviet second economy complemented the formal economy helping
it to achieve some of its formal goals as determined by central planning. However, it also
distorted the basic assumptions of the communist state affecting the entire socioeconomic
13
paradigm from the original design. As Altman pointed out just before the collapse of the
Soviet Union:
Like Janos, the twin headed Roman God, the Soviet socioeconomic system has
developed over the years two different identities, both steaming from a joint core
which holds the key to the future of the USSR. The recurrent question...is whether the
Soviet system will eventually collapse under the strain of the enormous disparities
between the two economies (formal and second). The evidence, however suggests a
symbiotic coexistence. There is no apparent structural reason why a thriving second
economy should uproot itself from the fertile ground in which it thrives. And why
should the formal economy give up the very many important services it receives
through the second economy. But the question remains: is the social and moral price
of such coexistence to high to pay? Gorbachev current Glasnot policy seems to
indicate that it is indeed too high (Altman 1989: ..)
The dramatic changes in the USSR initiated by Gorbachev, under the banners of
Perestroika and Glasnot, were directly instigated by the challenge of the informal economy
to the formal system. Gorbachev himself said so on many occasions. The presence of a
second informal economy was crucial to weaken the state. The informal economy in the
Soviet Union fed on the formal structure of society, while it helped the formal economy to
run, it also weakened it to the point of collapse. The prolonged economic crisis brought
Gorbachev to power: “without the economic crisis there probably would not have been the
Gorbachev phenomena” (Saxonbeng 2001: 129) and with it, the collapse of the Soviet
Union and of the communist regimes of its allies.
THE NETWORK ECONOMY IN POST-COMMUNIST SOCIETIES*
Studies in post-communist countries offer examples of the development and
maintenance the informal economy has had in the transition from centrally planned to
market exchange economy, and at the same time the importance that social relations based
on trust have had in that process (Stark, Sik, Ganev, Borocz, Rose, Ledeneva, Lonkila, and
others). The persistence of an informal economy based on social networks in postcommunism can be explained through its cultural heritages and historical and political
developments: successful resistance by large segments of society to the socialist state
insistence in making the large an highly formalized organization of the industrial firm the
dominant mechanism of social life; the recent history of the second economy as a strategy
of earning auxiliary incomes and through informal networking and the avoidance of law
and other formal rules and regulations. Moreover, managerial socialism served as a training
ground and a place for the original accumulation of informal network assets (“network
capital”2) for informal and managerial elite action. Finally the endemic capital shortages
*
In this section data from specific post-communist countries is used to prove a general point about trust in an
ideal type of post-communist society.
2
Sik proposes to use the term “network capital” to define “any type of personal network and its use in all
sorts of functions and according to any kinds of principles. In other words, network capital includes long-term
altruistic kin relations, balanced reciprocity, lasting and multipurpose patron-client relations, instrumental
14
“which have created the necessary structural conditions and some serious individual and
group-level incentives for the substitution of informal solutions for the formal
organizational procedures that only large capital investment can produce”. (Böröcz..Sik )
As an example, the process of privatization in post-communist countries have
shown that the previous nomenclatura has developed through connections and information
acquired during the communist era, a new “political capitalist” system by extracting
resources from the state and creating private enterprises (más de Stark?). In Bulgaria,
Ganev (1999) argues that the state’s lack of capacity to launch regulatory intervention is
caused by a form of elite action –networking which takes place in a specific structural
environment best captured by the notion of embeddedness of the post-communist state.
Networking then is likely to emerge as a dominant form of coordination in a situation
where the hierarchical nexus of the centrally planned economy no longer exits, and where
markets are yet to emerge. Ganev interprets the process of state transformation from
communism to post-communism through the examination of the dominant predatory elite
project after 1989 which he calls “extraction from the state”, stressing the decline of state
capacity as the dominant aspect of post-communism. “Powerful networks involved in this
project pray upon the wealth accumulated on the state domain. Fully capable of mobilizing
flow of resources within the institutional edifice of the state, these elites have no incentive
to develop strong state structures, quite on the contrary, undermining key institutions from
the inside is necessary for the success of their project.” (241).
Ganev exemplifies the dynamics of the transition through the analysis of
Multigroup, the strongest economic conglomerate in Bulgaria after 1989. The dynamics
which propelled Multigroup to the highest peaks of economic and political power have
been and continue to be the exploitation of "market niches" deliberately created or
"voluntarly vacated" by the state. The most interest characteristic of the business
relationships with state-owned enterprises is that the state comes out as a perennial loser
and its "partner" pockets all the benefits of "networking". The logic of Multigroup’s
enrichment is the logic of the state’s impoverishment. The focus remains constant: redirecting the flow of resources from a circuit operating with the confines of "state-run
institutions" to a more open-ended cycle with several "privatized" outlets. Multigroup’s
high ranking officials relied exclusively on the expertise of former communist state
officials who had occupied various sensitive positions within the communist state. Its
President was married to the daughter of the director of Military Counter Intelligence,
which gave him access to networks comprised of secret service officials and other insiders
from the state administration. The “first break” of the group was to buy an old Russian
submarine, cut it to peaces and sell it to a Turkish metallurgical plant, suggesting a
connection to a network of arm dealers spanning several countries. The vice-presidents and
general directors of the expanded conglomerate where all former heads of the most
powerful department of state security as well as heads of strategic departments of the
ministry of internal affairs which included the department of information and analysis.
Others were former directors of state-owned enterprises (oil industry, …industry and
micro-processing) and eight were former deputy ministers who served under the ancient
regime. In other words, Multigroup created an environment in which "stored knowledge"
about the Bulgarian economy was utilized. The biography of Multigroup’s strongmen
barter, as well as corrupt exchanges” (1994:74) For Sik, the size of an economic actor’s network capital is
equal to the sum of the existing networks which that actor is able to mobilize when needed.
15
suggests that it is the ways in which individuals are “connected” to networks which control
access to scare resource that really matters when it comes to comprehending the dynamic of
“economic reforms”- their personal, cultural, religious, ethnic and psychological
predispositions may be considered as spuriously significant attributes. (119).
In short, this example in a post-communism country shows how a different polity
emerged in which market opportunities are distributed on the basis of “cronyism”. It is not
corruption which characterizes post-communist governance it is cronyism that is its distinct
feature. In our words, networks of relatives, friends and comrades, which belonged to the
political and technocratic nomenklatura during the communist regime are the
intermediaries that convert political capital in economic capital. According to Szelenyi, it is
the “social and cultural capital”, knowledge, expertise, the capacity to manipulate symbols
that this nomenklatura networks manage to turn public property into private wealth. Postcommunism can best be described as a social space in which cultural capital is the major
source of power and privilege.
On the same vein, Böröcz claims that in the case of Hungary, “informal contacts”
became a most important asset in the transition. “Former state-socialist managers’ informal
social networks became such a crucial feature of the transformation that the structure of
their informal ties has determined not only personnel selection (top managerial) but also the
shape of economic organization” (Böröcz 2000: 351) Informal social networks assets of
key managers held together and provided coherence and consistency to the reform-oriented
economy. “What went on in these informal arrangements among managers, administrators,
planners and regulators was…akin to a symbolic and moral economy of favors, prestige,
privilege, friendship, lobbying, clique, coalition, building and group action” (ibid: 365).
Another feature of the transition in post-communists societies was the process of
uncontrolled conversion of state-own property into private ownership by members of the
communist elite. Two principal forms of values were used: the first one was foreign capital
through direct investment, the second and no less significant, include an array of noneconomic assets: expertise, practical knowledge and “most important a informal network
assets accumulated during the preceding period. These processes release a set of boldly
innovative, clique-based strategies aimed at converting non-economic assets into ever more
decisive control and ownership, with informal social assets in network ties to significant
individuals…informal networks assets were powerful competitor of specialized skills and
sheer power in term of their convertibility.” (ibid: 368-9) In Globalization and Its
Discontents, Stiglitz argues that the failure of the privatization process gired by the IMF in
post-communist Russia was due to the fact that enormous amount of economic assets were
transfer to a society which lacked the formal institutions capable of handling and
monitoring such transactions. The result of the first stage of privatization has been to give
away the nation’s assets to what amounts to a new criminal elite (2002--)
According to Böröcz “the most important aspect of the post-Stalinist state socialist
legacy is the privileged role of informality –a tendency of fundamental political, economic
and social structural transformations to take place “behind the scenes”, outside the realm of
public regulation, record-keeping and scrutiny. Informality, so conceive, has played a
crucial part in most processes of transformation seen so far.” (1993: 99) The fact that
personal informal networks (social assets) are the basis of this important part of the
economy, means that reciprocity (in the Polanyian sense) is the concept that allows us to
16
understand post-communist societies. Reciprocity in this case refers to a type of exchange
embedded in sociability. Trust is therefore the condition sin equa non that permits the
configuration of the social networks and the well functioning of the informal economy.
Ideally, however, when those informal cliques become formalized into conglomerates or
enterprises the rule of law replaces the unwritten rules of trust.
TRUST AS A SURVIVAL STRATEGY
Since the mid 1980s the state welfare and protection systems have been shrinking and by
now are far from being able to offer solutions for masses of people in trouble. The market is
less and less an alternative for needy households because prices are increasing and their
disposable incomes are decreasing. With the emergence of a market economy, some
became locked into permanent poverty. Thus, post-communism may have produced a “new
poverty” which survives thanks to an informal economy based on the use of trust-based
networks (Szelenyi 2001:5-10). At the same time, the effects of price liberalization in 1992
hit particularly the previously relatively well-to-do middle strata of Russian society.
Suddenly such professionals as engineers, doctors and teachers found themselves at the
brink of poverty. To cope with the new situation, different strategies were possible. One
possible strategy was to enter the market economy by trying to increase one’s revenue. But
more traditional strategies were based on the use of personal relations, and hence, at least in
principle, foreign to the abstract mechanisms of the market economy. First, social relations
and brokers were used in order to be able to obtain rare products. Second, personal relations
were needed in order to gain information about where to buy products or services. Finally,
social relations could also help to get products or services more cheaply than through the
formal channels (Lonkila 1997).
Lonkila in her study on Informal Exchange Networks in Post-Soviet Russia supports
Ledeneva’s conclusions about the continued importance of blat exchanges in postcommunist Russia. She affirms that in spite of the institutional macro-level changes, which
have affected the lives of individual Russian citizens, on the micro-level of Russian society
many things have not changed. Informal exchange and patterns of behavior inherited from
the socialist era still continue to influence the transition society in which the continuing
lack of trust in official institutions and social services is compensated with the use of their
personal relations. In the same way as the network economy operated to protect people
from the rigidities of the Soviet system, today it protects both people and companies from
the demands of the new “market” economy, by maintaining the flow of reciprocal
exchanges in the economy, and the rise of corruption and barter. State, market and
institutions of civil society have been influenced by informal practices not dissimilar to the
Soviet case. The difference from the Soviet era, however, is that the unwritten rules of
today’s order are defined by the pressures of the global economy as well as by the internal
context which does not mean that the network economy has lost its importance (Ledeneva
1999:1-2)
Amidst the turbulence of transition, what use do Russians make of their legacy of
social-capital networks? In Rose’s words and referring to Russia:
In the Russian context, where modernization is problematic, it is first necessary to classify
networks as pre-modern, modern, and anti-modern. Involvement in pre-modern networks is here
indicated by generic reliance on informal networks to get things done, living in a village, trusting
17
most people, regarding friends as a good source of information, and church attendance. Modern
networks are here indicated by generic reliance on the market, belonging to a formal organization,
turning to the government for help in dealing with a family problem, or being an opinion leader.
Indicators of anti-modern networks are generic reliance on corruption or connections to get things
done outside the rules, being excluded from involvement in all kinds of networks. Life in the Soviet
Union socialized Russian into getting around laws and regulations through connections and blat,
and the new Federation has created opportunities to get ahead. In consequence, anti-modern
networks have become the primary source of income security or insecurity.
CONCLUSIONS
1. Trust is a cultural concept that should be ethnographically described, as it’s
meaning varies according to the culture of each society and in every particular
situation. In this paper we present cases of three societies to show different
meanings of trust and uses of trust-based social networks in each of them. Trust
as a basic cultural trait has a longer life in the historical processes of society than
their specific formal economic and political systems.
2. We discuss the importance of trust in the configuration of social networks which
allow an informal economy to emerge and flourish in complex societies.
Informal exchanges based on trust are not only a residue of traditionalism but an
intrinsic element in many of today’s complex modern societies.
3. Informal exchange networks develop within modern formal systems in
accordance to the same rules of sociability determined by a particular culture;
hence, the informal economic activities cannot be understood solely in terms of
the laws of supply and demand or state regulations. On the basis of the three
cases presented, an underdeveloped capitalist society, a centrally planned and in
post-communism, we can appreciate how trust is culturally determined and
evaluated, producing different degrees of contradictions between the formal
ideology that guide the state and the cultural set of values that guide individual
behavior. Ideological contradictions between formal and informal systems more
often than not strengthen the rationale of friendship and kinship at the expense
of official morality.
4. The degree of formality and the inability of the formal system to satisfy societal
needs give rise to informal solutions. If the formal system is able to produce and
distribute the goods and services required by all members of society, informal
solutions would be less needed and thus less pervasive. Informal exchange
networks allow large sectors of the population to survive, and maintain their
status. However, informal activities also have negative consequences for society
as they do not increase the overall efficiency of the system; and tend to
perpetuate inequities and facilitate corrupt exchanges, leading to the formation
of criminal mafia-type organizations.
5. Depending on the formality of the system, the relative degree of
“inappropriateness” (illegal versus just “not a nice thing to do”), the goal of the
activity (profit-making versus altruistic), and the degree of repression, plus the
extent of tolerance the society has toward breaking bureaucratic rules, modes of
informal exchange may fluidly grade into: reciprocity, patron-client relations
18
and market exchange. Given the growing importance of informal exchange in
the formal sectors of modern societies, it follows that understanding the cultural
rules governing kinship and friendship may be more essential than ever for
gaining an insight into the operation of the economy and of the state.
6. In the cases studied, informal exchange permeated the formal system. If this fact
is not always recognized, it is because of administrative sanctions and
ideological conflict between the two systems. In Chile, the informal system was
more an expression of sociability and class solidarity than a way of promoting’
business deals, large or small, therefore it was not recognized as a corrupt
practice although there was a thin line between a-legality and illegality. In the
Soviet Union the prevalence of informal exchange depended, among other
things, on the relative scarcity of the goods and services available in society, and
on the existence of tight controls. Blat was seen as part of sociability and social
solidarity when it was not converted into market exchange. In post-communism,
informal networks of the previous nomenklatura elites, which possessed
relevant knowledge, information and social capital were able to remove legal
controls and create a “post-communist political capitalism”. In this case trust
allowed the formation of networks whose aim was to “grab” the resources the
communist state had been able to accumulate and convert it into formal
enterprises from which they derived personal profits. In other words postcommunists societies in this transitional stage are witnessing the formalization
of informality (of trust).
19
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